Is The Home You Are Staying In An Asset Or A Liability?

With Money Going Out Of Your Pocket Every Month, Is Your Own Home An Asset Or Liability?

Are Negative Cash Flow Properties Considered Assets?

Whenever housing agents talk about asset progression, it always entails the selling of your current HDB to upgrade to a private residence. However, people like Robert Kiyosaki from Rich Dad and Poor Dad will tell you that the house you are staying in is in fact, a liability. From his point of view, assets are instruments that are supposed to generate cash flow. The more assets you acquire, the more cash flow you get, and that is how the rich become wealthier. By that definition, your home is something that does not generate cash flow every month. There are mortgage payments, maintenance fees and other various costs. With all these expenses, how can we classify our home as an asset?

On the other hand, if you were to look up the Oxford dictionary, you would find that an asset is “an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.” Essentially, an asset is something of value that can be traded with another person. These items can be physical as such real estate, gold or even art. Or they can exist as intellectual property in the form of video games, music, movies, etc. With this definition, your home is an asset.

Does Upgrading And Changing From One Asset Class To Another Increase Your Liabilities?

With these two differentiating perspectives, who is right? Will upgrading from an HDB to a larger quantum condo increase your liability like what Robert Kiyosaki says? Is this even financially sound in the first place? Well, let us look at the numbers.

Whether it is an HDB or condo, interest costs always play the largest expenditure when it comes to a property for your consumption. Let us assume you have bought an HDB $500k. If you decide to stay in the HDB for the rest of your life, interest costs will amount to $101,836 for the entirety of the 25-year loan tenure. Or about $339.45 per month. If you can sell it above $601,836 or 20% higher than the initial amount you would have technically stayed for free for these past 25 years.

HDB Ownership Costs. Assumption of a 25-year loan tenure with an interest of 2%. With today’s low-interest environment, your breakeven is now even lower.

Alternatively, if you were to stay in a condo with a price tag of $1.2mil, your interest costs will now be much higher at $244,406 for these 25 years. Or $814.68 per month. The interesting fact is that if you were to sell it at the same margin of 20% as the HDB, you would have also stayed for free. Of course, this is an overly simplistic calculation as there are various other costs such as stamp duties, maintenance fees and property taxes. Additionally, you would also need to come up with a higher amount to make a deposit for the condo as well.

Condo Ownership Costs. Same Assumption Of 2% Interest Over 25 Years. The Lower The Interest, The Lower Your Expenses.

Capital Appreciation Is Critical To Understand If Your Home Can Turn Out To Be An Asset

Hence, the most important thing at the end of the day to determine whether your home is an asset, or a liability largely depends on capital appreciation. And also the time when you decide to sell them in exchange for money. For example, if you were to go and buy a BTO, most likely you would have some capital upside at the end of the day. If you are looking at a resale HDB, you will need to understand if the housing grants given by the government can offset any deprecation caused by the decaying tenure.

Private Residential Properties Are More Complicated

Private properties are a little more complicated because you have tenures that are leasehold and freehold. Then there are new launches under construction as well as resale units for immediate occupation. If you are purchasing a leasehold property, the general guideline is to ensure that prices go up by at least 20% within the next 30 years. By and large, certain new launches that are leasehold will almost certainly satisfy this condition in a relatively short timeframe.

Freehold properties, on the other hand, tend to retain their value better, and you can even pass down to the next generation. High network individuals prefer freehold properties and may even shell out $20 mil to $30 mil to purchase a one. If you do a simple calculation, high-end real estate like these not only have negative cash flow, the rental amount may not even sufficient to cover the interest costs of a loan!

You Would Be Lucky To Find A Tenant That Can Even Cover The Interest Costs Payments. But Does That Matter?

However, as time progresses, two things will happen. First, due to inflation, you need more money to buy the same thing. Second, the net worth of these individuals is increasing at an exponential rate. As a result of the combination of these two factors, prices of certain types of real estate (like GCBs, etc.) can only go in one direction. That is the main reason why the ultra-wealthy will choose to continue to acquire these assets despite having zero or negative cash flow.

Your Objectives Are Far More Important Than Classifying Your Home As An Asset Or Liability

Instead of merely classifying your home as an asset or a liability, I believe it is far more critical to understand your final objectives at the end of the day. With this clarity in mind, some decisions like upgrading to a private home, sell one buy two or even that purchase with zero cash flow can make a lot of financial sense. Of course, you must be equipped with the knowledge to understand the attributes of the various types of real estate in the market. Only then, will you make a well-informed decision to fulfil your goals. To kick start your journey, why not speak with us today via a video call? Book an appointment with us, and we will empower you with the necessary information to do so. Meanwhile, stay safe, do your research, and always look at the numbers!

Article contributed by Jerry Wong.

Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos and has been in real estate for ten years. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Book a video call appointment and Jerry will share with you the following.

  1. How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
  2. Why timing is not the most important thing. Because some people can buy the same condo at the same time, but one end up making $100k to $200k while the other suffers losses of the same amount!
  3. Understanding your requirements and craft a solution for your real estate needs. Be it in the form of asset progression, tax planning, financial calculations, rentals, sales, etc.

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